Everyone needs to think about the amount they’ll need for retirement, yet for this topic, it seems like there are just two categories of people: 1) obsessive folks who only think about numbers and work themselves to death saving for the future, only to not enjoy today, and 2) those that put their heads in the sand and ignore the issue altogether.
We propose a middle ground! Live for the day, know what you need, and spend responsibly.
What’s responsible spending? There are lots of calculators out there, mostly on the draconian side. and they are pretty good for W-2 type people. But life is different for a business owner, and we like to frame it around your mortgage: mortgage payment divided by .25.
So, if your mortgage is $4,000, $4000 / .25 = $16,000. If you are netting $16,000 / month in take home pay (e.g., your net W-2, company is ‘paying your taxes via distribution, and this is your other distribution check that’s yours) you should be fine. If you are taking home more than this but still struggling, you have some lifestyle choices that are out of whack. Stop eating out so much and cook your food!
Now, if your mortgage is higher, but you are making $16,000, you are house poor. Sell your house or figure out how to make more money (harsh, we know!).
How does this translate into needs for retirement? A good rule of thumb is to take your current living needs, dial down to 90% (adjusting up for taxes because you will be paying those now instead of taking distribution checks from the company) and multiply by 12. That’s if you want to retire at the normal retirement age.
Here's the math:
$16,000 X 12 = $192,000.
$192,000 X .9 = $172,800.
$172,800 / .75 (to adjust for taxes) = $230,400.
$230,400 X 12 = $2,800,000. This is what you need between all sources (which would include your business value). Hopefully, you will achieve more than this, but this amount should suffice.
Hope that helps! Feel like there’s room to improve? Check out The Vault for self-paced video courses taught by the BGW team. Tax planning, growth, cash flow, succession planning, retirement…we cover it all.
Let us know how we can help,
